2% SWR

[firewhen]

Hello everyone. I found this site a few months ago and decided to participate. As my name suggests, my biggest question is when to FIRE. My concern is that I will be FI long before I will be willing to take the plunge and RE. Some details:

We are in our early 40’s with 2 young children
No pension or health care insurance once I stop working (so other than savings we are entirely on our own)
We were both working and LBYM for many years until the children arrived

DW stopped working a few months ago. Between day care, commuting, taxes and the stress on the family it was not worth it. For the first time I analyzed our finances to see how we would do on 1 income. To my surprise, we spend much less than I imagined.

I want to be conservative given that we have no outside support other than Soc Sec 2 decades from now, and with children we are unwilling to radically change our circumstances (i.e. no move to a cheaper foreign country or to another part of this country). I have set a goal of FIRE when we have savings equal to 50 times our expenses. Said another way this is a 2% SWR. I know doing this will delay RE, perhaps substantially if the stock market underperforms. While I am conservative with RE timing, I am not with investing. I have been about 90% in equities for years, and this has been a great ride even with the early 2000’s dip. I believe that by saving enough I can enjoy the stock market returns and remain in equities even in retirement and weather any dips until the market recovers.

I know many might say that a 3% or even 4% SWR is essentially 100% safe, but given that we will need to live on savings upwards of 50 years, and have the expenses and responsibilities of raising children, including college, I want to be well cushioned. While my job is pretty good, I still prefer Saturdays to Mondays. Am I needlessly prolonging my working career by seeking 2%?

Thoughts anyone?

firewhen

 

[REWahoo]

Thoughts anyone?

firewhen

My first thought is to encourage you to keep working, the rest of us need you to fund SS and Medicare.

But in the spirit of the season, I suppose I should retract the above statement.

Your situation is not uncommon and there have been several discussions of the "I've got the $ but I'm afraid to pull the trigger" syndrome. I suggest you check out some of the older threads to see what you come up with. Since was 15 years older than you when I FIREd, I can't speak from experience on your 2% question, although it does appear to me to be conservative with a capital C.

Have you considered semi-retirement, doing seasonal or part time work? This might allow you to have considerably more of those Saturday and Sunday type experiences while giving you the comfort of wearing both a financial belt and suspenders.

Welcome to the forum.

PS: How do you reconcile your willingness to take on the risk of a 90% equity portfolio vs. the risk averse 50X annual expenses you need to retire?

 

[firewhen]

.

PS: How do you reconcile your willingness to take on the risk of a 90% equity portfolio vs. the risk averse 50X annual expenses you need to retire?

Thanks for your comments. I have been almost solely in equities for almost all of my adult life. Barring some catastrophe, companies should keep making profits, paying dividends, etc. so I do not see holding equities long term as a problem. That said, the Japanese stock market fell apart and that could happen here for awhile, so I want to be "safe" in still having an income. I suppose part-time is an option, but I would no longer have health insurance and probably could not make very much, which is why I am thinking full-time or RE.

 

[dex]

I sense from you posting is not "Am I needlessly prolonging my working career by seeking 2%?" It is more along the lines of can I or I'm affraid to RE as REWahoo states in his reply. When you want to RE in your hart and mind you as the right questions that get you there and make it happen.

The rational you give for the 2% SWR is not much different than a 62 year old person who can afford a 4% SWR and only needs a 2% SWR saying they want to work until 67 to get full social security benefits for the extra financial security. Is that person needlessly prolonging my working career by seeking extra SS benefits? I think so. In the SS example the person is giving up 5 of the best (remaining) years of their life for money they will never need.

 

[donheff]

You could beat 2% on the Pentagon Credit Union's CDs. You need to decide whether you are ready to quit work or not. If you like work and want to save more that certainly isn't the end of the world. But if you would really like to ER and are just afraid go for a conservative portfolio and a compromise SWR -- like 3%.

 

[Cb]

I suggest that you do some searches here on variable withdrawal strategies.

Cb

 

[dt123]

I'd like to read some of the past "got the dough, afraid to pull the trigger" threads. Anybody have a pointer to one or more of the memorable ones? If not, what would I search for?

 

[REWahoo]

I'd like to read some of the past "got the dough, afraid to pull the trigger" threads. Anybody have a pointer to one or more of the memorable ones? If not, what would I search for?

Search for "pulling the trigger", "afraid to ER", and the like. Be sure to enclose the phrase in quotations.

 

[Nords]

I have set a goal of FIRE when we have savings equal to 50 times our expenses. [...]
While I am conservative with RE timing, I am not with investing.

Am I needlessly prolonging my working career by seeking 2%?

Welcome to the board, Firewhen.

Your investing statements are logically inconsistent. The first is way-over-the-top conservative and practically guarantees that you'll leave a large estate to someone who'll enjoy the fruits of your labors. No problem if you don't mind working.

The second ensures that you could retire on as little as 25x expenses and maybe even less. Your tolerance for volatility will help you beat inflation handily, even the inflation of medical expenses.

The answer to your third question is "Yes." You essentially have three choices: get more money, spend less money, or be more comfortable with a smaller safety margin. Speaking as a former nuclear engineer, your margins are way too conservative.

The "spend less" part can examine the big challenges.
- Take a look at your kid's college expenses and ask yourself if you want to fully subsidize a free ride or if you want to have them put some of their own savings/work into it. This board covers the spectrum on who should pay for college but many seem to prefer funding a state college education and letting the kid decide how to fund anything more.
- How do you plan to pay for health insurance?
- A third option would be re-examine spending and to decide what really brings you value. Then see if there's a way to cut down or eliminate the rest. I suspect you've probably already done this step to the point of diminishing returns, but it's always easier to use less of something than it is to get more.

The "get more money" part may also be easier.
- Does your lifetime spending plan include both yours & spouse's Social Security? How is it affected by delaying your SS to age 70, thus allowing you to spend a little more of your ER portfolio before you're 70?
- Are you in a position to go part-time?

As for the "get more comfortable" option:
- One way to handle ER withdrawals is to put a couple years' expenses in cash. We use two years but some go as high as seven. The idea is to ride out the worst of a bear market before culling the equity herd to get through the rest of the down market.
- Take a look at Cut-Throat's "bare bones" ER budget. He has one spending plan for markets like 2000-02 and a completely different spending plan for yee-haw times like 1997-99. The key is to be able to move from one to the other as necessary without invoking familial howls of outrage. The truth is that you'll probably be secure enough knowing that you could adopt a bare-bones spending plan if you had to, and sometimes just the knowledge is all it takes to be comfortable with a 4% SWR for the rest of the time.
- I'd recommend reading Bob Clyatt's "Work Less, Live More". He was initially alarmed at his ER burn rate but has since relaxed in the security of knowing that he could always earn part-time income or vary his withdrawal rate. I think this book will give you the education to tolerate the uncertainty without over-nuking it.

 

[TromboneAl]

Barring some catastrophe, companies should keep making profits, paying dividends, etc. so I do not see holding equities long term as a problem.

Welcome to the forum. You might want to do some more research on allocation stragegies (e.g. www.fundadvice.com). Especially when you are in the withdrawal phase, you might find that a lower return with less variability will last you longer than a higher return with more variability.

 

[Bikerdude]

. I do not see holding equities long term as a problem. That said, the Japanese stock market fell apart and that could happen here for awhile, so I want to be "safe" in still having an income.

I believe it's been published/proven that a balanced 50/50 portfolio returns 85% of an all stock portfolio for 50% of the risk. I think Scott Burns or William Bernstein wrote about it.

 

[FIRE'd@51]

If you have a big enough portfolio to live (nicely) off a 2% SWR, it would be optimal, IMHO. Your portfolio could be 100% (or almost 100%) in equities, and you should be able to live solely off the dividends, in perpetuity. Over the past 45 years, dividends on the S&P 500 have grown about 1.3% above inflation. Basically, you should be insensitive to market fluctuations, since you should never have to sell any stock. Alternatively, you could invest 100% in TIPS and achieve a riskless real return of over 2%. However, I do feel you need to grow your income stream faster than inflation (as measured by the CPI) to continue "live well".

 

[uncledrz]

firewhen
Welcome to the board.
I believe that 25x expenses is a reasonable asset base with which to retire.
If that's early, fine. If late, so be it. OTOH, if your comfort level says 50x expenses and your work life is acceptable to you then that's fine too. So you get to choose.


Tio z

 

[firewhen]

Wow! Thank you everyone for all your responses. Much as I am reluctant to admit it, I am FI. I reviewed our expenses for the past 3 years on paper, and even factoring in $15,000 per year for family health care should I stop working, I think we would be about 3% SWR. I will continue working (don’t snicker), but with a renewed attitude. I have read on this forum a few months ago that people who are FI but don’t RE have similar attitudes to RE in that they are doing something they choose to do, not something they have to. I notice that many on the board have been counting down for years, but as I mentioned above, it was only when DW stopped working earlier this year and I started calculating how we would do on 1 income that I discovered we can manage on no working income.

I still have to mentally adjust to this and figure what I would do with myself were I not to work. As you might guess, I come from a background where money was scarce and we had little financial security and this is something I crave. I have read about this and am trying to not let this get in my way of otherwise moving on with my life.

A few other points and responses to Nords:

DW does not miss work or even think about it for 1 minute, though she does have the kids to keep her busy
I am planning on $100k for each child for college, which would fund a state school fully and a chunk of private. The rest could be funded with loans, etc. If we are doing really well financially down the road, I would likely pay for it all.
I have not factored SS into my planning because who knows what it will look like in 2030 and beyond. At the least it will be fully taxed and possibly means tested, so whatever we would get would be a bonus.
I do have about 10% between some bonds and cash which is my reserves for whatever (new car, major home repair, etc.).
I also recognize that like many people I am overly focusing on the negatives. In all likelihood, the stock market will resemble the past over the long-term and none of this will matter because I couldn’t spend my returns anyway. $10,000 invested in the stock market in 1926 over 80 years would be worth over $25 million now (I read this in a book) or the same amount would have grown to $1,431,800 over the 50 years from 1955-2005 as reported in Fidelity’s Stages magazine this quarter. This is why I want to stay in stocks.

I welcome any additional comments and otherwise will try to add my comments where appropriate to other people's questions in the different topics. Thanks again

 

[wabmester]

Alright, let's put this 4% SWR in perspective.

You're 40ish, which means that you and your DW are looking at perhaps 50+ years of retirement. This country we live in is 230 years old. As a country, we've only experienced 4 50-year epochs. The idea of the 4% SWR is based on data from roughly two of those 50-year epochs.

Personally, I think it is a reasonable assumption that the next 50-year epoch (i.e., our retirement) may reduce that 4% number, especially given the above-average market performance of the last 25 years. A 2% SWR is probably a bit low, but planning for something lower than 4% makes a lot of sense to me.

 

[firewhen]

Wab, thanks for your perspective. I hate to go against what I just said above, but afterwards I went on the Health and Early Retirement board and found my way to a link for individual premiums by state. Our state, NJ, has guaranteed coverage, but the prices are astronomical. Either we go HMO, which will cost at least the $15,000 for a family I mentioned above, or have a very high deductible, where we will likely go above the $15,000 between the premiums and out-of-pockets and dental, drugs, etc.

Meanwhile, for now, I am glad I have my job and coverage and I will continue to investigate my options and plan for the future. But to wab's point above if you plan for a 2% or 3% SWR there is less likelihood of an unpleasant surprise. At least now I am planning and considering for ER, which is farther ahead than I was just a little while ago! Thanks everyone.

 

[magellan_nh]

firewhen,

I was in a situation similar to yours a few years ago. Early 40s, able to FIRE on about a 3% withdrawal, not sure what to do, but didn't quite feel ready.

Anyhow, since I didn't mind working I stayed at it, but with a fresh new mindset. Then about a year later, things at my company fell apart. I dreaded going to work and morale was shot. As a VP in a leadership role, I was supposed to rally the troops with a positive message that I really didn't believe in.

Fortunately, I was able to get out with a 1 yr severance package including healthcare. My employment terms had a change of management control clause that answered the "when to pull the trigger" question for me. If I didn't exercise the clause right away, the severance package would go away. Also, by leaving I was able to signal my lack of confidence (to my team) without bad-mouthing anyone.

That was about 1 1/2 years ago and I don't have any regrets at all.

My point is that you'll know when it's time. It looks like you've done the necessary homework. Being ready when the time comes is really what it's all about. Based on what you've posted, I suspect you'll make the right call at the right time.

Good luck!

Jim

 

[lowflyer]

Well, it sure sounds like you've been doing your planning. RE is certainly a great idea and something that I personally wanted to do from the day I first started working! But lets face it, you've got to be practical. Your Wife isn't working and you've got two little kids. Relax, keep working and enjoy life. It's so easy to get caught up in this never-ending planning for RE...the problem is, you might just miss some great living along the way. Keep saving and planning. When the time is right to RE, you'll know it and be ready.

You've also hit on a really important point of having a "new attitude" about work when you know you can RE. My DW and I have been able to RE for several years now, but she still works a PT job that she enjoys and I get paid a few buck to do something that most people consider an expensive hobby. It makes for a good life.

Enjoy!